A company can be profitable on paper and still run out of cash. This happens when profits are tied up in unsold inventory, or when customers are slow to pay, while the company's own bills come due immediately. Working capital management is about ensuring the timing of cash inflows and outflows doesn't create a crisis.
The formula
Current assets include cash, accounts receivable (money customers owe you), and inventory.
Current liabilities include accounts payable (money you owe suppliers), short-term debt, and accrued expenses.
The cash conversion cycle
The best way to understand working capital is through the cash conversion cycle — how long it takes to convert inventory and activities into cash.
Positive vs negative working capital
| Positive WC | Negative WC | |
|---|---|---|
| What it means | Assets exceed liabilities | Liabilities exceed assets |
| Usually | Healthy, normal | Can be fine (Amazon) or dangerous |
| Example | Most manufacturers | Supermarkets (paid before suppliers) |
Supermarkets like Tesco have negative working capital — customers pay immediately at checkout, while Tesco pays its suppliers 30–60 days later. This means suppliers are effectively financing Tesco's operations. This is actually a sign of business strength, not weakness.
What this means for you
When reading a company's accounts, a sharp rise in working capital (especially receivables or inventory growing faster than sales) can signal trouble: customers are paying more slowly, or goods aren't selling. A falling cash conversion cycle, on the other hand, indicates improving operational efficiency — often before it shows up in profit margins.